Bharti hints at sweeteners as talks with MTN are extended

Bharti hints at sweeteners as talks with MTN are extended

New Delhi: Mobile phone operator Bharti Airtel Ltd, in talks with South Africa’s MTN Group for a possible merger, hinted that it could sweeten the deal for the latter’s shareholders in order to get their approval for the transaction.

Bharti said in a statement here on Monday that both companies had agreed to extend the deadline for the exclusive talks by a month to 31 August. The Johannesburg- based MTN issued a similar statement. The earlier deadline elapsed on Friday.

“The structure and terms of the potential transaction may be adjusted to reflect further discussions between the parties," the statements said.

Analysts say the sweetener could be more cash for MTN shareholders and better representation for them on the board of the merged entity.

Bharti said in an email that it had no further comment to offer.

Bharti Airtel, India’s largest mobile phone operator, and MTN announced on 25 May that they had revived talks on a complex $23 billion (Rs1.1 trillion) merger to form the third largest telecom company by subscribers (with at least 200 million subscribers in at least 20 markets from South Africa to India) after China Mobile and Vodafone Group Plc. The combined entity would have revenue in excess of $20 billion, becoming one of the largest telecom firms in emerging markets.

Also Read The Bharti-MTN Saga (PDF)

China Mobile’s revenue is in the region of $60 billion while Vodafone’s is around $65 billion.

An agreement between Bharti and MTN help the companies trim costs and challenge Vodafone, which is counting on the at least 1.7 billion people in Africa and India for growth.

Bharti and MTN plan to spend about $7 billion this year to extend their reach in markets from the Cape of Good Hope to the Himalayas that contributed almost 90% of Vodafone’s new users.

“They want to be a world player and clearly they are looking at India as not being something that’s hugely attractive for the next couple of years," Romal Shetty, executive director for telecommunications at KPMG’s Indian unit, said before the announcement.

Bharti’s billionaire chairman Sunil Mittal, 51, may still have to convince MTN’s shareholders about the benefits of combining with the Indian company and accept his offer. The two companies failed to reach an agreement last year after differences over control.

More details are expected to emerge after the MTN board meets on 27 August. According to the May announcement, Bharti had proposed to acquire 49% in Africa’s largest mobile-phone company while MTN and its shareholders planned to acquire an effective 36% stake in the Indian telco.

Bharti has offered 86 rand (Rs541 today) plus one Bharti share for every two MTN shares to acquire approximately 36% of the currently issued share capital of MTN from MTN shareholders in the form of global depository receipts (GDRs). This, along with MTN shares issued as part settlement for the South African company’s acquisition of an effective stake of around 25% in Bharti after the transaction, would have taken Bharti’s stake in MTN to 49%. The remaining stake in Bharti was to be held by MTN shareholders.

Each GDR, equivalent to one share in Bharti, was to be listed on the Johannesburg securities exchange operated by JSE Ltd, South Africa.

The deal needs the approval of shareholders who own at least 75% of MTN stock. Reuters reported on 28 May that some MTN shareholders, including Coronation Asset Managers, which holds about 5%, have rejected the proposal.

At least four of MTN’s top 25 shareholders will reject an offer from Bharti, Reuters reported on 27 May, citing the investors.

China Mobile Communications Corp., the parent of the world’s largest wireless carrier by users China Mobile Ltd, may be interested in bidding for the South African carrier, UBS AG analysts Suresh Mahadevan and John Slettevold wrote in a report last year, before MTN announced its talks with Bharti.

Shares of Bharti Airtel remained largely flat on the bourses on Monday, closing at Rs411.10 each, up 0.55% on the Bombay Stock Exchange. MTN shares were trading at 127.90 rand, down 0.08%, at 8pm India time.

The sweeteners

Analysts say Bharti could increase its cash offer per share of MTN to make the deal more attractive to the South African firm’s shareholders. “Last time around, they were offering 150 rand per share (including the value of the Bharti share). Though it cannot go that high as the market valuation has fallen, there is room for the offer to go up by around 15%," a Mumbai-based analyst said on condition of anonymity.

While Bharti could also make MTN an equal partner in the merger by giving it more shares in the Indian telco, “this is unlikely as Bharti comes from a position of strength in terms of bargaining power due to the size of the Indian telecom market", the analyst added.

MTN group is present in 21 markets across Africa and West Asia and covers a population of at least 500 million, while Bharti covers nearly 90% of India’s 1.2 billion population. “More than 60% of our subscribers are from rural markets which make up around 700 million of the population," Manoj Kohli chief executive officer of Bharti Airtel had said while announcing the company’s results for the three months ended 30 June on 23 July.

After the transaction, Singapore Telecommunications Ltd (Singtel), which holds almost 30% in Bharti Airtel, could see its shareholding fall by 11%. In order to keep its shareholding at current levels, the firm could buy the GDRs held by MTN shareholders at a 5-10% premium, a Mumbai-based analyst with a multinational brokerage said on condition of anonymity.

“But this is an ancillary transaction and may not have any effect on the outcome of the talks," Kevin Trindade, senior analyst with Mumbai-based KR Choksey Shares and Securities, said.

The first analyst said the sweetener could also take the form of more representation for MTN shareholders in the board of the merged entity. “Since both firms are largely family-held businesses where MTN’s two largest shareholders are the Mikati family and South African government-run Public Investment Corp. Ltd, board representation will be key."

Still, any change in the contours of the deal could either require the firms to seek regulatory approval again or make pending regulatory approval more difficult.

India’s stock market regulator, the Securities and Exchange Board of India, has allowed MTN and its shareholders to acquire an effective 36% in Bharti without triggering an open offer which an acquisition of any stake in excess of 15% in a listed firm immediately triggers.

A deal may face fewer hurdles than Vodafone’s purchase of a controlling stake in Vodacom Group. The Congress of South African Trade Unions, the country’s largest labour federation that filed a lawsuit against the Vodacom deal, said on 27 May that it doesn’t plan to block an MTN-Bharti transaction. India’s finance minister Pranab Mukherjee on 26 May termed the two carriers’ proposal to combine a welcome move.

A much-needed deal

MTN chief executive officer Phuthuma Nhleko has been looking to expand in markets outside the continent and said in March the company wanted to make a meaningful acquisition this year. Africa’s biggest wireless provider last year failed to close deals with Bharti and its nearest Indian rival Reliance.

Nhleko has driven the company’s expansion north from South Africa into 21 countries throughout the continent and West Asia, covering a region with a combined population of at least 500 million. In April, MTN crossed the 100-million customers mark as it added users in Nigeria and Iran.

The combined operation will help Mittal’s Bharti increase overseas sales at a time when Reliance and Vodafone are narrowing its lead in India. Competition is also intensifying with the entry of more foreign rivals, including Japan’s NTT DoCoMo Inc. and Norway’s Telenor ASA.

“It’s very clear that the next three-four years in India are going to be extremely, extremely difficult," KPMG’s Shetty said. “It’s going to be a little bit of a bloodbath in India."

Bloomberg contributed to this story.

Graphics by Sandeep Bhatnagar / Mint